Friday, December 19, 2014

Crouching sanctions, hidden revenues

by Lev Igorevich

Dollars for borsch

There is a lot of speculation about the economic health of Russia
in the light of tougher sanctions, falling oil prices and tumbling ruble.
Concerns are raised whether Russia can afford it’s
existence. However, those concerns are paper thin and are presented in more of
a mocking spirit, because in most prediction acrobatics, actual revenues of
Russian state are not considered at all. Many sources, in their predictions for
Russian economy, are repeating the same mistake over and over again. Roughly
speaking - assesments are made under the assumption that Russians pay dollars
for their borsch. In reality, Russia sells borsch for dollars. This is
important point to consider, because Russia pays it’s
public sector expenditures (education, healthcare, pensions, police, army etc)
in rubles!As we all knew (those who didn’t got
it stamped in the face this year thanks to the good will of liberal media),
Russian revenues are based on natural resources. Sales are conducted in FX
(except for special agreements, some of which are still pending). So let’s
take a look how the purse of Russian state is being filled. For the purpose of this article, rough numbers were taken from Nasdaq
WTI chart for oil and XE USD/RUB chart for FX. Example will be based on
average gas price for Germany in 2013, which was $366 (according to Bloomberg).

Oil SituationAs far as Russian Treasury is concerned, income from oil industry
is just fine and is probably exceeding early 2014 estimates for next years
budget. Even at tumbling oil prices, falling ruble is compensating more than
enough - revenue rose roghly 12% year-over-year.

Year

Month

WTI Crude $

USD/RUB

RUB revenue

2013

1Y
AVG

97

33

3201

2013

November

94

33

3102

2014

February

103

36

3708

2014

May

103

35

3605

2014

August

95

37

3515

2014

November

75

46

3450

2014

December

60

60

3600

Crisis
Average

88

41

3497

Gas situationLet’s take a look at this
years picture using the same ruble prices from the oil chart. It is easy to see
that ruble revenue almost doubled by the end of the year and avaregad 31% more
in year-over-year income.

Year

Month

Gas3 $

USD/RUB

RUB revenue

2013

1Y
AVG

366

33

12078

2014

February

366

35

12810

2014

May

366

35

12810

2014

August

366

37

13542

2014

November

366

46

16836

2014

December

366

60

21960

2014

1Y
AVG

366

43

15592

Surprise, n***a!On paper, Russia will have good fiscal numbers and a solid budget
for 2015. This of course is just a cover image. Russia plans major investments
for 2015 and onwards (with developments in the west, Russia needs “2020”
to happen much quicker) and is most likely to tap it’s
floating currency mechanisms for issuing more rubles for those investments. I
doubt that Russia will waste FX by selling them for rubles right off the bat if
they can print the money against fresh FX holdings. The “big
throw” will be reserved for
later as we all know what happens to countries that dump dollar overnight. Last
thing Russia (and China, too) needs right now is another color/umbrella
revolution being sped up. Equally importantly, one must not forget that Russian
and Chinese financial systems combined hold trillions of US treasuries (it’s
insane to hold cash as bank deposits are guaranteed up to $250K, treasuries
have no limit against bankruptcy) which they wouldn’t want
to depreceate before major swap and secure measueres are in place. So unless
the west comes in with guns, don’t hold your breath for
international ruble just yet. Instead, what Russia needs right now is a weak
ruble that will force to dump imports and start thinking about substitution and
better yet realizing Russias natural potential. The plan is to force Russians
to think about long-term local business, not just quick-buck consumerism.
Russia must give a crude awakening slap to the late and advantage to the early
wakers amids decreasing foreign profits. Make the business to step up with own
goods and technologies, initiate a cross-sectoral build up and stop companies
syphoning money off-shore where it gets pocketed by western “asset
managers”.Fate’s
irony or enjoy your bathIronically, weak ruble will also punish EU for doing dirty work
for the US. Now it’s for everyone to see
that US waves the stick while the EU pays the price. Weak ruble will decrease
tourism from Russia and exports to Russia. EU’s
agricultural sector is already sensing light, but increasing pain. Tech industry
shall follow if Russia is to prolong the embargo and weak ruble combo. Yes, low
ruble means less purchasing power abroad. Yet it also means competitive advantage for Russian goods in
foreign markets and thus increased selling power - a signal for future
development. Mercedes-Benz has announced that it plans to build several plants
in Russia. Volvo, Renault-Nissan and others are already there. If this will
materiaize - hello jobs for Russians and goodbye long awaited economic recovery
for EU! Germany will be punished for it’s ambition to monopolize
the distribution of Russian gas by attempting to take Ukraine into its fold
through post-coup privatization (now just a crushed dream), while actually
opening Pandora’s Box for US to exploit.
Get ready for a triple whammy (must be some excellent German engineering)!
Firstly - US took Ukraine over and kicked Germany over the fence with Merkel
compliantly shutting up. Secondly, EU’s sales to Russia were
decreasing and with tumbling ruble are guaranteed to decrease even more. South
America, Turkey, India and China will be more than happy to fill the void. And
thirdly, how’s prospect of Turkey becoming major regional
gas hub for you? Saxon greed has met its borders within the mauling paws of the
bear while oldest nations of the world are economically invited to watch the
show.Crackdown on Brokeback MountainDuring the 18.12.2014 press Q&A session, when asked if he has
confidence in the elites surrounding him, Putin replied that the biggest
confidence stems from the overwhelming support of the Russian people. That was
after some quite dangerous fifth column definition gymnastics and attempts to
break Putins confidence took place. Russia will use current economic situation
not only to punish it’s western “partners”,
but also will have the perfect excuse, once comfortable, to clean up its fifth
column in the government and banking. While low ruble will add pressure to
European economy and steep central bank rate will stop predatory ruble trading,
Putin will have a card up his sleeve to unleash the “wrath
of Russian people” onto
the traitors in the establishment responsible for “susceptibility to western
sanctions”, “unexpected currency dive”
and “expensive financing”.
Switching staff by popular demand will remove a lot of questions internally and
give that extra legitimacy externally. “The Moor has done his
work, the Moor may go” at its
finest. However, lowering the funds rate at the central bank will probably not
give any rise to ruble (because of foreign perception, not economic reality),
but as previously laid out, that might be desireable all along - easier
financing and boosted competitivness is what the business always needs.

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